Survey
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
ECO 609/Dr. Mitchell/February 10, 2000 Week 5 The Instruments of Trade Policy Tariffs Tariff = a tax on imports or exports Reasons for an Import Tariff Discourage domestic consumption of the good Generate revenue Decrease balance-of-trade deficit Protect domestic industry Types of Tariffs Specific A fixed amount per unit Pd = Pw+T Ad valorem % of price Pd = (1+t) Pw Effects of Tariff: Small country case Defining small v. large countries for international trade. Small Its sales and purchases do not affect its terms-of-trade. Large As it buys more, the world prices of its imports rise. As it sells more, the world prices of its exports fall. Partial Equilibrium Trading Equilibrium in the Small Country Consumers’ Surplus The value to consumers from consuming a particular quantity of a good, less the amount consumers pay for the good. Graphically, it’s the area under D curve, above price. Producers’ Surplus Revenue received from selling a particular quantity of a good less the minimum amount required to supply that quantity. Graphically, it’s the area above S curve, below price. 1 ECO 609/Dr. Mitchell/February 10, 2000 Week 5 2 LR Supply Curve The LR supply curve represents the industry's ability to supply the good at different prices in the LR. It incorporates changes in the number of firms and also changes in factor prices as the industry expands. If the LR supply curve is upward sloping, it represents increasing costs in the industry. In perfect competition, the height of the LRS curve represents the firm's average cost of production. Producers' surplus then represents rents accruing to factors of production because of the increased demand for this good. P S (dom) A B SW PW C D E D Qs Qd CS = A+B PS = C Efficiency A measure of the efficiency in a market is the sum of CS & PS (& gov’t revenue). Graphically, it’s the area in between D & S. Q ECO 609/Dr. Mitchell/February 10, 2000 Week 5 3 How does a tariff affect the market & efficiency? Tariff-ridden trading equilibrium P S (dom) A1 B4 P’D A2 PW B2 B1 B3 SW C D E1 E2 Q’s E3 Q’d D Q Identify: CS PS Tariff revenue Deadweight losses Transfers from cons. to prod. Transfers from cons. to gov’t. NET welfare loss due to tariff Why is there deadweight loss? B3 = lost CS because of fewer units consumed. B1 = wasted resources because it costs dom. producers this much more to prod. these units than it would cost to import General Equilibrium Effects--Small Country Domestic relative price of the imported good rises. Produce more of the imported good, less of the exported good. In LR, real return to the relatively abundant factor is reduced, real return to relatively scarce factor is increased. (Apply the Stolper-Samuelson Theorem.) Effects of Tariffs--Large Country The large country faces an upward-sloping world supply curve. ECO 609/Dr. Mitchell/February 10, 2000 Week 5 4 Sdom P SI PW PD DI Ddom QC QP I Sdom P S+t PD’ PD PW’ QI Q J K J L N SI M PW DI Ddom QP QP’ QC’ QC Q QI Identify CS PS Tariff revenue Change in CS Change in PS Deadweight losses Gain from foreign suppliers Bottom Line for a large country: Costs: Deadweight loss due to producing too much, consuming too little. This is the volume-of-trade effect. Benefits: Cheaper foreign goods, which shows up as tariff revenue. This is the terms-of-trade effect. I ECO 609/Dr. Mitchell/February 10, 2000 Week 5 5 The Optimum Tariff Choose the size of the tariff to maximize: CS + PS + revenue. A large country is better off imposing the optimum tariff than pursuing free trade (if other countries have free trade). Retaliation The optimal tariff hurts the trading partners. They would do better by responding with a tariff. Imposing a tariff may lead to a “trade war” in which countries keep increasing their tariffs. Ultimately all countries may be worse off than with free trade (although some could be better off). Quota A legal limit on imports of a good, expressed in units Sdom P Sdom + Q Q P dom’ Rent Sw Pw D dom Q Quota Rents The premium earned by selling a good at quota-inflated prices. Disposition of quota rents depends on the method of allocating the right to import First-come, first served Rents go to importer. Auctions Rents are bid away in auction, collected by the gov’t in the form of payment for import licenses. ECO 609/Dr. Mitchell/February 10, 2000 Week 5 6 Given away to domestic importers Rents nominally go to importer. However, the importer may have expended resources to persuade the government to give the import licenses to that firm. The expenditure of real resources to influence the decision is called "rent-seeking". The importer may not truly get the rents, they may really go to the gov't official or they may be used up. Given away to foreign gov’ts or foreign importers Rents go to the foreign gov’t or importer. Similarities between quotas & tariffs In a perf. comp. market, it is always possible to choose a quota (to replace a tariff) which yields the same prices and quantities. Differences between quotas & tariffs Disposition of tariff revenue/quota rents With tariffs, it goes to the gov’t. With quota may go many different places, depending on how the right to import is allocated. There is the possibility that rents go abroad. Results of changing D & S curves Ex: Growing demand over time With a tariff, the domestic price needn’t change (small co. case). But with a quota, the domestic price will automatically rise over time. In imperfectly competitive markets, a quota is conducive to higher prices With a tariff, a domestic monopolist faces unlimited imports at an artificially high price. With a quota, he faces a limited Q of imports, enabling him to profit maximize subject to a lower demand for his output. Voluntary Export Restraints (VERs) An agreement between countries to limit exports of a particular good to a certain level. A voluntary quota in which quota rents usually go to foreign producers. It’s used because quotas violate our obligations under the WTO. The exporting country agrees to the VER under duress (threats of worse measures). Example: Japanese auto imports. Regulations as Non-tariff Barriers (NTBs) Domestic Content Requirements A law that says a particular % of input cost must be paid to domestic suppliers. It effectively limits imports of raw materials and intermediate goods. ECO 609/Dr. Mitchell/February 10, 2000 Week 5 Government Procurement Policies Requirements on government contracts that the supplier is domestic or that give a preference to domestic suppliers. US-Domestic suppliers are given a 6% margin over foreign suppliers, except in defense, where it is a 50% margin. Product Standards Laws controlling the type of product that may be sold. Health regulations Safety regulations Labeling laws Example: US-EC dispute over hormones in beef exported to the EC. 7